Copper Falters on Weak China Data, Fed Disappointment

Resource Investing News

Jun. 22, 2012, 7:00 AM

Copper struggled to gain a firm foothold this week as Chinese manufacturing appeared sluggish and hopes that the Federal Reserve would make aggressive moves to prop up the sagging US economy were quashed. Rising concerns about the Spanish banking sector are also bogging down the price of the red metal. Yet with demand outstripping supply worldwide, copper producers should be heartened about longer-term prospects.

Fear about a slowdown in Chinese demand is undoubtedly keeping copper investors on their toes. Chinese manufacturing reached a seven-month low in June when the preliminary Flash China Manufacturing Purchasing Managers' Index reached 48.1, according to HSBC Holdings and Markit Economics. In May, the figure reached 48.4; the lowest number during the 2008 financial crisis was 40.9 in November of that year. Chinese exports declined at the fastest rate since March 2009, and HSBC's chief economist for China, Hongbin Qu, stated that "with external headwinds remaining strong, exports are likely to decelerate in coming months."

In the US, the Fed's decision to bring down longer-term borrowing costs by extending Operation Twist, its current bond-buying program, until the end of the year has dashed investors' hopes for a new round of quantitative easing.

Gloom over Europe's financial outlook has shifted to Spain from Greece, and market eyes are now closely monitoring the country's banking system to assess if and how the European Union could intervene to prop up the country's ailing economy. EU leaders will be meeting next week to discuss the financial future of the union, and Spain's prospects will undoubtedly be high on the agenda.

Despite such global risks, copper's longer-term outlook is likely to remain favorable as demand outstrips supply. The International Copper Study Group reported that there was a production deficit of 135,000 metric tonnes in the first quarter as global use of the metal rose by 9 percent from the same period a year ago due to strong Chinese demand. Chinese use of copper rose by 32 percent, and accounted for 43 percent of global market share, the Lisbon-based group reported.

Indeed, Rio Tinto's (ASX:RIO,NYSE:RIO,LSE:RIO) CEO Andrew Harding said at an industry conference in Hong Kong that the longer-term outlook for the global copper market remains strong even as near-term commodity prices fluctuate.

On Thursday, COMEX copper for July delivery was 1.41 percent weaker at $3.34 a pound.

Company news

Rio Tinto said that it will invest $660 million over the next seven years to extend the life of its Kennecott Utah Bingham Canyon mine in order to ensure low-cost commodities output. The mine is projected to produce 180,000 tonnes of copper per year from 2019 to 2029, as well as 185,000 ounces of gold and 13,800 tonnes of molybdenum.

"This investment highlights the additional value we can create by the efficient investment of capital at existing tier one assets. It will secure low cost copper, gold and molybdenum production for the next two decades. We continue to evaluate underground options that will further extend the life of Bingham Canyon, which has already been in operation for more than 100 years," Harding said.

Xstrata (LSE:XTA) is selling a stake in its Papua New Guinea project as it reassesses its operations worldwide. The company has an 81.8 percent stake in the site, which may produce 246,000 metric tons of copper as well as 379,000 ounces of gold during the first eight years of its life. Highlands Pacific (ASX:HIG) holds the remaining shares.

Codelco and Anglo American (LSE:AAL) are looking to extend their deadline to settle a dispute about Anglo American's Chilean assets, according to Reuters. The deadline for the two companies to reach an agreement is this week, but they may ask for up to an additional 60 days to settle the dispute over whether Anglo American can sell a 24.5 percent stake in Anglo American Sur to Mitsubishi (TSE:8058) as it hoped to last November. Codelco is looking to exercise its long-standing option to buy a 49 percent stake in the unit.

Junior company news

Lumina Copper (TSXV:LCC) is now up for sale, and mining giants have expressed considerable interest in acquiring the Vancouver-based company's wholly-owned Taca Taca copper-gold-moly project in Argentina. The mine will not begin production until 2017 and will require $3 billion to develop, but speculation is growing that companies including BHP Billiton (ASX:BHP,NYSE:BHP,LSE:BLT) and Rio Tinto could be interested in acquiring the mine.

Mantis Mineral (OTC Pink:MNTCF) sold its high-grade copper Grass River project to VMS Ventures (TSXV:VMS). VMS will acquire the claims outright for a one time issuance of 500,000 common shares of the company. Those shares will be restricted for a period of four months from the date of issuance.

Securities Disclosure: I, Shihoko Goto, hold no direct investment interest in any company mentioned in this article.